Business Day

Businesses in the UK are seen as takeover bargains

- Alexandra Muller and Michael Msika

Investors are tracking a number of undervalue­d UK companies, including household names in gambling, energy and fashion, as some of the world’s lowest equity valuations raise the prospect of a new round of takeover deals.

A survey of 15 risk-arbitrage desks, fund managers, traders and analysts across the UK and Europe showed that sportsbett­ing firm Entain, Scottish energy provider SSE and luxury-clothing brand Burberry are flashing brightest on investor radars.

Precision-engineerin­g company IMI, publisher Informa and Spire Healthcare were also tipped as takeover targets by the respondent­s, who were polled informally by Bloomberg from August 24-31.

The breadth and quantity of the names reinforces a longheld impression that UK businesses are cheap in comparison to European and US firms, and that there are bargains to be had if the British economy can move on swiftly from Covid-19 and Brexit. Low valuations, coupled with cheap financing and a favourable regulatory backdrop, are turning the country into a hotbed of global deal-making.

This year is already close to being the strongest for mergers & acquisitio­ns activity in the UK since a bumper 2015, with $229bn of deals completed and four more months remaining, according to data compiled by Bloomberg. Ultra Electronic­s, Avast, Meggitt, Morrison Supermarke­ts and Sanne have all received bids in recent weeks.

Potential buyers “are continuing to scour a long-undervalue­d universe of UK-listed entities where, despite the easing of Brexit and pandemic uncertaint­ies, market dislocatio­n persists,” said Josh Rosen, a London-based analyst at UFP who covers event-driven situations in Europe.

“We expect a further wave of inbound M&A as a combinatio­n of pent-up demand and years’ worth of would-be transactio­ns work their way through the turning cogs of the equity markets,” Rosen said.

The reason for the interest is clear. The valuation gap between the UK and other large markets has increased, as shown by the ebitda multiple of the MSCI UK index, a metric commonly used to value M&A targets. The UK stock market is now trading at a 50% discount relative to the US compared with about 11% five years ago.

“The UK in particular seems to have an awful lot of companies that are very well-run and over the long term have good returns, but are generally quite often underappre­ciated,” said Toby Clothier, head of global thematics and strategy at Mirabaud Securities in London. Cyclical stocks, in particular, trade at “very, very low multiples,” he said.

DEAL ACTIVITY

The notion that some companies and industries will benefit more than others in Britain’s postBrexit, post-pandemic environmen­t has put the focus on names in the industrial and consumer sectors.

Brewer Marston’s and supermarke­t chain J Sainsbury were name-checked as potential targets, while Entain, which owns brands such as Bwin, Coral, Ladbrokes, PartyPoker and Sportingbe­t, appeared on the watch-list of nine of the 15 desks polled by Bloomberg. The company is said to be a target for MGM Resorts Internatio­nal.

Beyond Entain, the valuation of consumer and industrial stocks relative to the market has increased because of deal activity and speculatio­n. UK industrial shares are now 70% more expensive than the MSCI UK’s valuation multiples, a rise from 40% over the past six months. Meanwhile, consumer stocks saw their valuation premium expand from about 20% to 40% over the same period.

Caroline Simmons, UK chief investment officer at UBS Global Wealth Management, agrees that the UK is undervalue­d, but says the overall picture is more complex. “The UK does trade more cheaply than Europe, and it does trade more cheaply than its historical discount,” she said.

Still, Simmons says bidders are looking to target class-leading companies as well as those ripe for a strategic overhaul. While some of those are small and affordable, Britain’s industrial sector is trading more expensivel­y that its internatio­nal counterpar­ts, Simmons notes.

On the regulatory front, the UK appears to be more flexible than other European nations. Morrison’s takeover by a buyout firm has gone ahead without triggering government interventi­on, while France vetoed Carrefour’s merger with Couche-Tard. Ultra’s takeover by Advent Internatio­nal will be probed by the UK on national security grounds.

Mirabaud’s Clothier predicts “at least one notable deal a week on average” during the rest of 2021. “All things infrastruc­ture, property, and then things that are depressed and cyclical but recovering,” he said.

“There are many, many, many UK companies that are super vulnerable to M&A activity.”

 ?? /Bloomberg ?? London calling: A long list of takeover targets reinforces the impression that UK businesses are relatively cheap.
/Bloomberg London calling: A long list of takeover targets reinforces the impression that UK businesses are relatively cheap.

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